How Does a Money Market Account Work?

What is a Money Market Account?

A money market account is a low-risk savings account. The interest it pays fluctuates with the prime rate. This is because financial institutions use cash from money market accounts for other investments and to lend to other people. They pay more interest on money market accounts when they are receiving more interest on money they are loaning to other people.

How to Open a Money Market Account

You can open a money market account at most banks, credit unions or mutual fund companies. They are usually set up so that one dollar equals one share. Money market accounts generally require higher opening balances than regular savings accounts. This can range from $1000 to $2500. There are often penalties and fees if your account drops below this amount. To open a money market account, just fill out the paperwork and write the financial institution a check.

Purchasing Shares in a Money Market Account

Money can be added at any time to a money market account. This can be done by check, account transfer, bank transfer or a wire transfer. Since financial institutions make money off of the cash in your money market account, they offer incentives to purchase more shares. They generally pay more interest when your money market account balance reaches higher levels.

How Money Market Accounts Pay Interest

Most money market accounts compound interest daily and pay it to you once a month. The compounding of interest is a considerable benefit. The financial institution pays you interest on the interest they paid you yesterday. The interest yield shows how much the money market account actually pays over the course of one year. This is always higher than the interest rate because of compounding.

Withdrawals from a Money Market Account

Many money market accounts restrict how much and how often you can withdraw. Checks are often issued with money market accounts, but must be written for a minimum amount. This varies from $100 to $500 depending on the account. There are often restrictions on how many checks you can write and how many withdrawals you can make per month. Sometimes there are fees for writing checks.

Closing a Money Market Account

There are no time obligations with money market accounts. You can close your money market account at any time and withdraw all of your money without penalty.